Smoke, Mirrors and Economic Reality

What industries beyond the service sector will offer Nevada the diversification it needs to ensure economic prosperity? Improving education, reforming tax structures and articulating clear economic goals have been low priorities for state and local governments. Too often smoke and mirrors are substituted for addressing the very stumbling blocks and economic challenges impeding such desirable goals. Do Nevadans have the political will to drive a stake through the heart of counterproductive policies which discourage economic diversification?

Something of Value

What are the factors which determine improving economic value in Nevada? Ray Bacon, the executive director of the Nevada Manufacturers Association (NMA), says that the basic ingredients are "construction, manufacturing, mining and agriculture." These are the core considerations that tend to produce wealth and drive other sectors of the economy. Yet Nevada has invested very little in these segments of its economy. In Nevada, ranching and agriculture have declined 40 percent over the past five years. Even though this loss was promulgated predominantly by federal policy and land grabs, the state has done little to protect these assets.

At the national level, other critical segments of the economy have also shown decline. Overseas crises—especially in Asia—have hit U.S. manufacturing quite hard, and manufacturing now accounts for only 17 percent of U.S. wages, salaries, benefits and profits. Manufacturing accounts for a miniscule portion of Nevada’s economy. Can Nevada—or the nation, for that matter—really afford further decline in these important basic industries?

Robert Hayes, a Harvard expert in the economics of manufacturing, recently said, "My concern is that we can go too far down. But I don’t know how far down ‘down’ really is." Switzerland is the only other developed nation whose manufacturing sector has lost more ground than the United States. But Switzerland holds interesting parallels to Nevada. In Switzerland banking and tourism are more prominent than manufacturing as sources of wages and profits. But according to Hayes, banks can leave by virtue of mergers and acquisitions even faster than factories, and tourism depends on robust economies to produce income for leisure expenditures. Nevada may not be noted for its banking industry but it can certainly understand the connection between a prosperous economy and the survival of tourism as an industry.

Depending on the Service Sector

Policy makers are betting on the service sector to propel continued economic growth in Nevada. But is this a safe bet? In Nevada, according to the Nevada Industrial Employment Survey, manufacturing employs just under 41,000 people, or 8 percent of all workers. The hotel industry, which makes up the lion’s share of the service sector, employs 370,000, or 45 percent of all workers. Government employs 103,000 people, accounting for 31 percent of all employment. If government and service are grouped together as non-product industries, non-producing industry accounts for 76 percent of all employment in Nevada—a risky proposition for economic growth.

Four Sources of Income and Growth

The goods and services that provide a high standard of living do not just happen. Their production requires work, investment, cooperation, machinery, brain power and organization. Stated another way, there are four major sources of production and income growth: improvements in the skills of workers or education; capital formation which enhances the productivity of workers, providing them with better tools to do their jobs; improvement in technology—the knowledge about how to transform resources into goods and services; and improvements in economic organization of which legal innovation is key.

A Sign of Nevada’s Economic Times

Nevada’s population growth of over 5 percent in 1998 produced only about 2,300 new manufacturing jobs. Why? If we use the four keys to production and growth as stated above, the reason is quite simple to ascertain. First, Nevada has toyed around the edges of public education reform, with the result of producing a lackluster, ill-equipped young population entering the job market. NMA’s Bacon says that business owners bemoan the absence of a skilled labor force more than any other single aspect of trying to do business in Nevada. It isn’t the ability to do brain surgery that’s required, but simply a labor force knowledgeable and capable in math and reading, and possessed of the technical ability to read a blueprint.

Second, Nevada’s excise tax and business tax systems stifle capital formation. "Nevada has an inability to compete with other states in creating or expanding manufacturing jobs due to a counterproductive tax structure," Bacon asserts. He cites the 7.5 percent tax on new equipment as an example which constitutes a disincentive to attracting manufacturing companies.

Third, Nevada continues to pour millions into a university system lacking a top-notch curriculum to stimulate business. Its engineering school is below the threshold necessary to undertake basic research and development, and it is home to only one technical school. Admission requirements for the school of education are laughable and the computer science department is only beginning to pull out of the basement for competitive technology development.

Finally, improvements in economic organization can promote economic growth. Of the four sources of growth, this one is probably the most overlooked. Economic organization that protects wasteful practices and fails to reward the creation of wealth will retard economic progress. It is in this area Nevada’s new law school could help—teaching about private ownership, freedom of exchange and competition which promotes the efficient use of resources and the stimulus for innovative improvements.

The "Vision Thing"

When given the opportunity to address the challenges which face the state’s economic future, the Legislature invariably waters down what might otherwise have been effective legislation. Lack of quality education in Nevada is clearly part of the problem. Yet effective legislation—particularly the charter school bill—is routinely neutered in deference to the Nevada State Education Association teacher union and other special interests who are all too content with the status quo. Additionally, the Nevada Legislature refuses to modify the state’s counter-productive tax structure, depending instead on boosterism and the myth that Nevada is a low-tax state to entice industry to locate here. As the Nevada Industrial Employment Survey shows, much more will be needed to bring industry to the state, and thus lay a firmer economic foundation.

Diane Alden is a writer/researcher with the Nevada Policy Research Institute. She can be contacted at dja@npri.org.